Your unemployment benefit is taxable income; it shouldn’t be

WASHINGTON » Samantha Meyer collects $280 a week in unemployment benefits — after federal and state taxes.

Yes, unemployment benefits are taxed.

If Congress ever gets around to passing another stimulus package, it should remove the federal taxability of unemployment benefits.

With corporations and uberwealthy Americans able to take advantage of generous tax breaks that reduce their tax liability, it seems only fair that people receiving unemployment compensation shouldn’t bear the burden of having their payments tapped for taxes during a pandemic that is crushing them financially.

For the week ending Aug. 22, a little more than 1 million people applied for unemployment insurance, according to the Labor Department. People need every dollar to make ends meet, particularly now that the enhanced $600 weekly bonus authorized under the Coronavirus Aid, Relief, and Economic Security (Cares) Act has ended.

In addition to the federal tax burden, most states also tax unemployment benefits. The IRS recently issued a press release reminding people receiving unemployment compensation that they can and probably should have taxes withheld to avoid a tax bill when they file their federal return next year.

States are required to inform all new claimants of their responsibility to pay income tax on their unemployment benefits. Still, understandably, many people stressed by their financial situation may not realize they have to either elect to have taxes withheld or file estimated quarterly tax payments.

“With so many Americans now receiving unemployment benefits who have either never received them before or haven’t in a long time, it’s probably worth reminding folks that they have the option of voluntary tax withholding,” said IRS spokesman Eric Smith.

Under federal law, there are only two choices for withholding on IRS Form W-4V, which covers unemployment compensation: 0% or a flat 10%, says Eric Bronnenkant, head of tax at online financial adviser Betterment.

“It is generally a good idea to have withholding if there is a tax liability expected after factoring in all income and withholding from other sources during the year,” Bronnenkant said.

It’s tempting to opt out of withholding tax. But kicking the tax obligation down the road could be an expensive choice. On top of the interest you may owe if you can’t pay your tax bill on time, you could be hit with an underpayment penalty.

The U.S. has a pay-as-you-go tax system, which means taxpayers are supposed to pay income tax as they receive it during the year, either through withholding by an employer or by making estimated tax payments. If you don’t pay enough tax throughout the year, you may have to pay an underpayment penalty, which is currently 3%.

“I opted into having the taxes taken out upfront, but I’m failing to understand how or why they need to tax this?” says Meyer, who is a member of the Washington Post’s Navigating Unemployment Facebook page, a community of people who are out of work because of the pandemic. Meyer, who worked in property management, said it took her four months to get her benefits.

Like so many others, the Madison, Wisconsin, woman complained about the taxation. “I’m not choosing to be in this position,” she said. “I’m also not collecting that much in a week.”

Until 1979, unemployment benefits were taxfree.

But the Revenue Act of 1978 set a threshold at which unemployment compensation would be taxed. Benefits were taxable only for single tax filers whose adjusted gross income exceeded $20,000, or $25,000 for joint filers.

The rationale behind the taxing benefits in the late ‘70s is the same for reason many Republicans who have argued recently against extending the extra $600 a week under the Cares Act. They want to discourage people from relying on unemployment benefits. During the taxation debate, policymakers relied on research that made the absurd conclusion that taxing unemployment benefits would encourage people to look for work, according to a 2015 report by the Congressional Research Service.

Practically, this makes no sense for the jobless. Eventually, unemployment runs out. “If an unemployed worker waits until he is near the end of his eligibility for benefits to consider re-employment, he risks considerable discomfort,” one researcher countered in a paper published in the National Tax Journal in 1976. “Further, it has been shown that a spell of unemployment lowers expected subsequent earnings.”

Nonetheless, legislators of the Carter and

Readers can write to Michelle Singletary c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071. Her email address is michelle.singletary@ washpost.com. Follow her on Twitter (@ SingletaryM) or Facebook (www.facebook.com/ MichelleSingletary). Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.